Medicare Could Lower Drug Costs if It Negotiated Prices Directly With Drug Companies

January 18, 2006

Medicare Could Lower Drug Costs if It Negotiated Prices Directly With Drug Companies

For Immediate Release: January 18, 2006

Contact: Lynn Erskine 202-293-5380 x115

Washington, DC -- Medicare could pay lower prices
for prescription drugs if it negotiated directly with the pharmaceutical
industry rather than through private insurance companies, according to a report
by the Center for Economic and Policy Research.

The report, "The Savings from an
Efficient Medicare Prescription Drug Benefit," found that the drug
benefit is far more costly than necessary because Congress did not make
efficiency a top priority when it created the Medicare Modernization Act (MMA).
Instead, the new drug plan ensures that private insurance companies provide the
benefit and play an expanded role in the Medicare program.

"The Medicare Modernization Act costs the
government and beneficiaries considerably more than is necessary," said
economist Dean Baker, CEPR's co-director and author of the report. "If
Medicare could negotiate directly with drug companies it could save the federal
and state governments hundred of billions of dollars and cut insurance
premiums."

The study projects the potential savings that
would result if Medicare could pay the same prices for drugs as countries like
Australia and the program was administered in a more efficient manner. The
potential savings are so large that the current projected budget for the program
would be enough to fully finance the benefit with no contribution from the
beneficiaries whatsoever. In fact, it would still leave a surplus of $40 billion
(over the years 2006-2013) which could be divided between savings to the state
and federal governments.

The Congressional Budget Office (CBO) claims that
Medicare must pay higher prices for drugs than healthcare systems pay in other
wealthy countries, such as Australia and Canada. It claims that this is
necessary because Medicare could not achieve substantial price reductions by
negotiating directly with the pharmaceutical industry, which is what healthcare
systems in these other countries do.

The report notes that this claim appears to
contradict CBO's own evidence. Just as CBO missed the stock bubble, and
overstated capital gains tax revenue by almost $500 billion in its 2001 budget
projections, CBO has apparently made a major mistake in its projections. If this
error goes uncorrected, it will be a substantial obstacle to designing a more
efficient, user-friendly drug benefit.

The Center for Economic and Policy Research is an independent,
nonpartisan think tank that promotes democratic debate on the most
important economic and social issues affecting people's lives. CEPR's
Advisory Board of Economists includes Nobel Laureate economists Robert
Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at
Harvard University; and Eileen Appelbaum, Professor and Director of the
Center for Women and Work at Rutgers University.